Dollar Tree Success Portends Changes in Retailing

(MoneyWatch)  If Dollar Tree's success indicates that consumer are still penny pinching and not ready to drive the economy out of recession, the latest earnings figures it released are not good news to anyone but shareholders.

Conversely, if they are indicative of a consumer that is enjoying the freedom frugality brings ?€" such as not having to worry about what the neighbors will think about shopping trips to bargain-oriented stores, as they are browsing alongside ?€" then it's only bad news for flashier retailers who may win back fewer customers from lower priced competitors as recession abates. Dollar Tree might even be a test case for how retailers that have performed better than their brethren based on consumers trading down for value -- dollar stores, Wal-Mart and even warehouse clubs such as Costco and BJs -- will hold onto customers after the recession.

Consumer confidence has climbed to a 54.9 rating. Pretty dismal, but still better than the 40.8 that reigned just a month ago. If it continues to climb towards 100 and relative health AND Dollar Tree keeps building sales, it might be safe to say that consumers have fundamentally changed their shopping patterns.

Keep in mind that the recent success of Aldi, Lidl and what are called hard discounters in Europe came after a period of economic stagnation in Germany that forced middle class consumers to choose between forgoing luxuries or skimping a bit day to day. Enough Germans and later other Europeans chose to cut back on the everyday to propel the hard discounters. Trends like trading down to low cost retailers and purchasing more private labels suggest that consumers in the United States have been skimping on the recurring items on their grocery lists, too, spending the money that they've saved on lifestyle items like flat panel televisions.

Consumer confidence is up, but Dollar Tree continues to gain, and it's expanding consumables to provide more bargains on the everyday needs that keep consumers stopping by. The retailer also has been making investments in expensive refrigeration equipment to make itself a more attractive destination for food shoppers.

CEO Bob Sasser said in a conference call this week:

As a part of our effort to provide more of what our customers want, we continued to offer frozen and refrigerated products in more stores during the first quarter of 2009. We added freezers and coolers to 96 more Dollar Tree stores. That brings our total to 1,203 Dollar Tree stores compared with 1,058 stores at the same time last year. We're on track with our plan to add freezers and coolers to 150 stores for this year, and we will have frozen and refrigerated product in about 1,257 stores by year's end.

The company also is getting its selling proposition in front of more consumers, adding 79 stores in the first quarter and ending with 3,667. It plans to add 210 more Dollar Tree stores by the year's finish as well as 25 Deal$ format stores. Deal$ is bargain oriented but has prices that range above a dollar as opposed to its sister format, which keeps things below a buck.

Dollar Tree posted first quarter earnings per diluted share of 66 cents versus 48 cents last year, above the high end of 54 cents per share guidance and analyst consensus of 59 or 60 cents, depending upon who collected the numbers. Comparable store sales gained 9.2%. Most of the comp gain can be attributed to more consumers visiting stores, management stated. Dollar Tree raised its earnings estimate for the second quarter to 47 cents to 51 cents, which was more than the 46 cents analysts anticipated.

Keep an eye on Dollar Tree. Like other bargain retailers, it's fighting to hold on to what it has gained in the recession. In doing so, it might emerge as a divining rod for the next phase of retailing's future.